'Perfect storm' led to IRS fiasco, former employees say

May 20, 2013
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by The Cincinnati Enquirer, USA TODAY

by The Cincinnati Enquirer, USA TODAY

CINCINNATI -- The tax-exempt determinations division of the Internal Revenue Service has long been considered a bit of a dead end within the agency.

Earning between $40,000 and $77,000 a year, workers plow through more than 70,000 applications a year in an assembly-line environment in this sleepy, cubicle-lined office on the fourth floor of the John Weld Peck Federal Building in downtown Cincinnati.

The Enquirer interviewed several former IRS workers and retirees and reviewed federal documents to get a glimpse inside the office at the center of the controversy over improper targeting of politically conservative groups seeking tax-exempt status.

A huge swath of managers and workers retired from the division over the last 10 years, so others were brought in from elsewhere in the IRS with little to no experience in the complicated area of tax-exempt law. New management worried more about metrics and quantity than about whether the rules were being followed, the former division employees told The Enquirer.

In 2003, the former workers said, the IRS removed checks and balances in place to review the work coming out of the office, and experts in Washington could no longer be called in for complex cases. This was done to centralize and streamline operations to help the agency cut costs, but it also removed a key review process.

And the office became increasingly insular, barely communicating with tax attorneys and accountants in the public, much less with supervisors in Washington, even as more and more politically active groups started applying for tax-exempt status.

The combination became what former high-ranking IRS official Marcus Owens calls a "ticking time bomb" â?? one that went off two weeks ago when the IRS acknowledged improperly targeting politically conservative groups seeking non-profit status and asking inappropriate questions in the application process.

"These people had barely any direct interaction with the outside world. ... Everything was done by mail or sometimes by phone," said Owens, who ran the IRS Exempt Organizations division between 1990 and 2000 and is now a Washington-based tax attorney. "And they had no one to tell them that these shortcuts and search terms and intrusive questions might be a bad idea."

The Enquirer tried several times to reach local workers asked to appear before Congress. Most did not respond to attempts to contact them at work and at their homes. Another declined to comment, deferring all questions to IRS headquarters per agency policy. One worker and his family even have temporarily moved out of their home to avoid the media attention and hired a dog sitter, according to neighbors.

Dozens of workers who streamed out of the downtown office at lunchtime seeking food or taking a smoke break Monday also declined to comment or deferred comment to IRS media representatives. Some hid their identification name badges.

U.S. Rep. Brad Wenstrup is taking any comments or complaints from local IRS workers, whose office is in his district. His spokesman said that the office has received a "handful of responses," but declined to share them for privacy concerns.

Not a glamorous gig

Owens said that unlike the "glamorous" position of revenue agent, which allows workers the freedom to visit businesses and meet with taxpayers, workers in the Cincinnati determination office were the kind "to come in at 9 a.m., leave at 5 p.m. and turn out the lights."

"Any organization needs steady workers like that, but they are probably not the right kind of people deciding the criteria for categorizing cases," Owens said. "And because of the demographics and a large number of retirements, you had new managers in there. They may have been used to looking at returns for Procter & Gamble or General Motors, but small nonprofits is a whole different matter. The workers knew more about it than the managers did."

The workers actually doing the case work were ranked GS (General Service) 7 through a GS-11, according to experts. To get to that level, IRS employees need a college degree, usually in law or accounting. That would allow a worker to make about $40,000 for the first rung of a GS-7 up to nearly $78,000 for a top-level GS-11, according to the 2012 General Service pay scale for Cincinnati, put out by the U.S. Office of Personnel Management.

The department was created in the mid-1970s to deal with increasingly complex nonprofit tax laws. A lot of the seasoned veterans who had been with the tax-exempt group retired when they became eligible over the last 10 years, Owens said.

That came as the workload increased, especially following a key Supreme Court decision and another law passed by Congress that allowed certain nonprofit groups to become more political, accept tax-free contributions and keep their donor lists private.

According to the inspector general's report at the heart of the controversy, the IRS received 73,319 applications for tax-exempt status in 2012 alone. That was to be handled by a staff of about 140 workers on the fourth floor of the Peck building.

One IRS expert said that this surge of nonprofit applications became crushing for the local Cincinnati office, with even routine cases taking up to a year to process.

"And that could be a best-case scenario if you don't need a review," said Paul Streckfus, a former IRS official who now operates a newsletter concentrating on nonprofit tax law. "You could be a simple garden club and if there is something that needs review, then you are easily looking at a year."

A 40-year IRS veteran, Martin Friedlander, helped review and check on exemptions and sensitive cases coming out of Cincinnati until 2003, when budget cuts forced such reviews at Washington headquarters to be eliminated. In addition, this centralization in Cincinnati meant any complex case that had previously been sent to Washington for clarification would stay in the Peck building.

He said that the "tremendous pressure" of moving cases quickly through the system, coupled with a relatively inexperienced and insular office, and the added complexity of the new type of 501(c)(4) political groups applying for tax-exempt status created a "perfect storm."

"They were looking at average times to process applications rather than trying to get it right," said Friedlander, who retired in 2009. "What is also very, very disappointing to me is that no one got personally involved. When the complaints started flying, that should have been a red flag to the officials in Washington."

The experts and former officials say that they strongly believe the targeting was not done for partisan reasons.

"This was just a series of bad decisions and lack of oversight," Friedlander said. "Now it's just sad. ... A lot of people will get caught up in this net and have their careers ruined and will be defamed. It's a shame, really."